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Legal experts say it’s rare to pursue jail time in securities fraud cases like Paxton’s

By Pooja Salhotra, The Texas Tribune

Legal experts say it’s rare to pursue jail time in securities fraud cases like Paxton’s” was first published by The Texas Tribune, a nonprofit, nonpartisan media organization that informs Texans — and engages with them — about public policy, politics, government and statewide issues.

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The securities fraud charges that have dogged Attorney General Ken Paxton for nearly a decade were more akin to the financial sins of Kim Kardashian than Bernie Madoff, legal experts said Tuesday, as a deal was announced to drop the charges against Paxton.

Cases like Paxton’s are typically prosecuted in civil court and would not result in jail time, said lawyers specializing in securities fraud. But state prosecutors have, for nine years, been pursuing charges against Paxton that held a maximum penalty of up to 99 years in jail.

“This is not really what people think of when they hear securities fraud,” said James Spindler, a professor of law and business at the University of Texas at Austin. “This is not Bernie Madoff or Sam Bankman-Fried,” who were both convicted of perpetrating billions of dollars worth of fraud.

[Ken Paxton agrees to community service to avoid trial, conviction in securities fraud case]

Paxton was indicted in 2015 on two counts of first-degree securities fraud and one third-degree charge for failing to register as an investment adviser. He was accused of soliciting investors to buy stock in a Dallas-area technology firm called Servergy without disclosing that he would be compensated by the firm. He was also accused of steering clients to his friends’ investment advising business without registering with the state’s securities board.

Christine Hurt, a securities law professor at SMU Dedman School of Law, likened Paxton’s behavior to that of celebrity influencers like Kim Kardashian, who settled with the U.S. Securities and Exchange Commission in 2022 after she promoted certain cryptocurrencies on social media without disclosing that she was receiving compensation to do so.

Paxton’s charges are expected to be dropped, based on a pre-trial agreement reached Tuesday, in exchange for community service, paying restitution to the alleged victims and other fulfillment of obligations laid out in the deal.

Lawyers who study securities law said that people accused of similar crimes often settle before trial by agreeing to pay a fine. They said it was highly unusual for the state to pursue criminal penalties for technical violations that one could feasibly commit unintentionally.

“We can hold you civilly liable, but typically if you weren’t doing something you thought was bad or wrong or reckless, you don’t have the requisite standard to be deprived of your liberty,” Spindler said. “That’s why this never really gets prosecuted in a criminal manner.”

That explanation largely supports the narrative Paxton’s lawyers have reiterated since the charges were brought early in his first term as attorney general. Paxton has portrayed the case against him as a politically-motivated attack. And on Tuesday, Paxton’s attorney Dan Cogdell said the case was only brought because of Paxton’s political stature.

“He’s the only person in history that was prosecuted for failure to register after he paid a

$200 administrative fee,” Cogdell said. “I don’t think any of this would have happened but for the fact that he was the attorney general at the time they investigated.”

Prosecutor Brian Wice rejected the notion that politics played a role in any discussions to pursue or drop the charges.

“Number one, none of the conduct that we’ve alleged occurred on his watch as attorney general,” Wice said to reporters after the deal was finalized. “Number two…no one is above the law and no one is beneath it.”

Securities fraud refers to a broad range of behavior that can include running a Ponzi scheme, encouraging people to invest in a sham company, recruiting investors by telling them lies about a company, or insider trading.

Hurt, the SMU professor, said she moved to Texas about two years ago and when she heard Paxton faced securities fraud cases, she assumed the charges were more egregious. She was surprised to learn what the charges were when she looked into the case this week.

“I don’t want to downplay the severity of this,” Hurt said. “But these types of cases are usually settled for just a fine and are not career-ending sanctions.”

Cogdell said that if the case had gone to trial, he was confident that “once a jury understood the allegations, it would have been far less dramatic than the title” of “securities fraud” suggested.

“Because human nature makes it impossible to predict what 12 strangers are going to do, we made the pragmatic decision to resolve the case this way,” he said.

Under both state and federal law, investment advisers must tell their clients if they are getting

paid to promote a stock. The SEC did file civil charges against Paxton for allegedly misleading investors in Servergy. A federal judge threw out those charges in March 2017, but specially appointed state prosecutors pressed forward.

The state case has been delayed numerous times as side battles played out over where the case should be tried and how much the special prosecutors should be paid. Attorneys said those delays may have been part of Paxton’s strategy to extend the case for so long that the prosecution would ultimately throw in the towel.

The deal came before Harris County state District Judge Andrea Beall just three weeks before the case was scheduled to go to trial. It is not uncommon for cases to settle right before trial.

A trial in this case could have posed challenges for the prosecution, who would have faced a jury who would likely hold strong political opinions about the attorney general.

Cases often reach an out-of-court settlement on the eve of trial, attorneys said, but could signal that the prosecution felt unsure about their prospects.

“The state probably didn’t feel great about the case; otherwise they would have pushed to a trial,” said Andrew Wirmani, a former federal prosecutor. “Either way, it is good that this is getting wrapped up so Texans can move on.”

Cogdell, though, said he finds that pretrial diversion — the mechanism used to resolve Paxton’s case — is “sparingly used” in the cases he handles, many of which involve high-profile allegations of white collar crime. He estimated that some two to three of his own cases are resolved by such diversion agreements out of the 40 or 50 he may have pending each year.

“The takeaway is, the prosecutors finally started investigating the case and realized they were going to lose, so they made us an offer we couldn’t refuse,” Cogdell said.

Jasper Scherer contributed to this report.

Disclosure: University of Texas at Austin has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune’s journalism. Find a complete list of them here.


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This article originally appeared in The Texas Tribune at https://www.texastribune.org/2024/03/26/ken-paxton-securities-fraud-case/.

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